Ofgem said energy firms’ profit margins had risen fairly significantly over the last seven years or so.
Photograph: Rui Vieira/PA

The UK’s biggest energy companies made a profit of £1bn last year and have increased their profit margins in recent years despite losing millions of customers to challenger firms, according to Ofgem – the Office of Gas and Electricity Markets.

The energy regulator said the big six suppliers enjoyed a healthy margin of 4.5% on average in 2016 by charging higher prices to consumers who have not switched, with the gap between the best and worst tariffs widening to £300 a year.

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“Supplier margins have been rising fairly significantly over the last seven years or so,” said Joe Perkins, Ofgem’s chief economist.

“Some of that increased margin is clearly down to increased cost efficiencies but the level of [consumer] engagement also plays a role.”

The regulator found that if energy suppliers made the same profit on poorer-value standard variable tariffs as they did on cheaper fixed-term deals, the big six would have posted a loss of 6% last year.

British Gas made the biggest profit margin last year, at 7.2%, followed by E.ON with 7%, SSE with 6.9% and Scottish Power with 5.2%. Npower and EDF both made a loss.

A spokesperson for the Department for Business, Energy and Industrial Strategy (BEIS) said: “The regulator’s report shows there are still millions of people paying too much for their energy.

“While it is positive to see 1 million fewer people are on poor-value tariffs this year, it is not right that the majority of people remain on them.”

First Utility, one of the biggest challenger firms, said the report was further evidence of why ministers were capping prices.

“It [a cap] is the inevitable consequence of the big six’s lack of regard for their customers and they only have themselves to blame,” said Ed Kamm, the company’s chief commercial officer.

However, the £1bn profit is down from the peak of £1.2bn, with smaller suppliers driving the big six’s market share down to 80%.

“Profit in absolute terms has been falling for the six largest suppliers as they’ve been losing customers to smaller firms, so whilst they’re making a stable or increasing margin on revenues they earn, that revenue base has fallen somewhat as new entrants are coming in,” said Perkins.

Ofgem said it was pleased that households were using a fifth less energy than a decade ago, largely because of improvements in energy efficiency such as insulation and better boilers.

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But the regulator is concerned that some people are rationing their use of gas for heating, such as by turning down the thermostat. It believes a third of the reduction in gas consumption over the last 10 years is a result of consumers limiting their heating in response to price hikes.

“Self-rationing is a particular risk for low-income consumers,” said Perkins.

While May’s wider cap is unlikely to take effect until 2019, Ofgem said that a narrower cap on 4m vulnerable households had reduced typical dual fuel bills by £60 a year since being imposed in April.

However, the regulator found the cheapest tariffs had been withdrawn and most suppliers had converged with pricing just under the cap. It would not be drawn on whether May’s cap would have the same effect.

Richard Neudegg, head of regulation at comparison site uSwitch.com, said: “Prices have converged around the level of the prepayment price cap and Ofgem acknowledges that some consumers have seen their bills rise due to the cheapest deals being withdrawn.

“One of the risks of applying a cap to the wider retail market is that the competitive forces which drive prices down will be squeezed out, leaving customers with nowhere to go to escape expensive tariffs or poor service.”

Ofgem’s state of the market report also said the cost of keeping the lights on in recent years could have been cheaper for consumers if National Grid had more accurately forecast the number of power stations required to be on standby during winter.

Another area where households had sometimes paid “a higher cost … than necessary” was for policies cutting carbon emissions from energy, the report said.

“This hasn’t come cheap,” said Perkins, of the subsidies paid by consumers to support windfarms and solar panels in recent years.